Posts filed under ‘Politics’

This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (February 2, 2015). Subscribe on the right side of the page for the complete text.

In the weeks building up to Super Bowl XLIX (New England Patriots vs. Seattle Seahawks) much of the media hype was focused on the controversial alleged “Deflategate”, or the discovery of deflated Patriot footballs, which theoretically could have been used for an unfair advantage by New England’s quarterback Tom Brady. While Brady ended up winning his record-tying 4th Super Bowl ring for the Patriots by defeating the Seahawks 28-24, the stock market deflated during the first month of 2015 as well. Similar to last year, the stock market has temporarily declined last January before surging ahead +11.4% for the full year of 2014. It’s early in 2015, and investors chose to lock-in a small portion of the hefty, multi-year bull market gains. The S&P 500 was sacked for a loss of -3.1% and the Dow Jones Industrial index by -3.7%.

Despite some early performance headwinds, the U.S. economy kicked off the year with the wind behind its back in the form of deflating oil prices. Specifically, West Texas Intermediate (WTI) crude oil prices declined -9.4% last month to $48.24, and over -51.0% over the last six months. Like a fresh set of substitute legs coming off the bench to support the team, the oil price decline represents an effective$125 billion tax cut for consumers in the form of lower gasoline prices (average $2.03 per gallon nationally) – see chart below. The gasoline relief will allow consumers more discretionary spending money, so football fans, for example, can buy more hot dogs, beer, and souvenirs at the Super Bowl. The cause for the recent price bust? The primary reasons are three-fold: 1) Sluggish oil demand from developed markets like Europe and Japan coupled with slowing consumption growth in some emerging markets like China; 2) Growing supply in various U.S. fracking regions has created a temporary global oil glut; and 3) Uncertainty surrounding OPEC (Organization of Petroleum Exporting Countries) supply/production policies, which became even more unclear with the recent announced death of Saudi Arabia’s King Abdullah.

Source: AAA

More deflating than the NFL football’s “Deflategate” is the approximate -17% collapse in the value of the euro currency (see chart below). Euro currency matters were made worse in response to European Central Bank’s (ECB) President Mario Draghi’s announcement that the eurozone would commence its own $67 billion monthly Quantitative Easing (QE) program (very similar to the QE program that Federal Reserve Chairwoman Janet Yellen halted last year). In total, if carried out to its full design, the euro QE version should amount to about $1.3 trillion. The depreciating effect on the euro (and appreciating value of the euro) should help stimulate European exports, while lowering the cost of U.S. imports – you may now be able to afford that new Rolls-Royce purchase you’ve been putting off. What’s more, the rising dollar is beneficial for Americans who are planning to vacation abroad…Paris here we come!

Source: XE.com

Another fumble suffered by the global currency markets was introduced with the unexpected announcement by the Swiss National Bank (SNB) that decided to remove its artificial currency peg to the euro. Effectively, the SNB had been purchased and accumulated a $490 billion war-chest reserve (Supply & Demand Lessons) to artificially depress the value of the Swiss franc, thereby allowing the country to sell more Swiss army knives and watches abroad. When the SNB could no longer afford to prop up the value of the franc, the currency value spiked +20% against the euro in a single day…ouch! In addition to making its exports more expensive for foreigners, the central bank’s move also pushed long-term Swiss Treasurybond yields negative. No, you don’t need to check your vision – investors are indeed paying Switzerland to hold investor money (i.e., interest rates are at an unprecedented negative level).

In addition to some of the previously mentioned setbacks, financial markets suffered another penalty flag. Last month, multiple deadly terrorist acts were carried out at a satirical magazine headquarters and a Jewish supermarket – both in Paris. Combined, there were 16 people who lost their lives in these senseless acts of violence. Unfortunately, we don’t live in a Utopian world, so with seven billion people in this world there will continue to be pointless incidences like these. However, the good news is the economic game always goes on in spite of terrorism.

As is always the case, there will always be concerns in the marketplace, whether it is worries about inflation, geopolitics, the economy, Federal Reserve policy, or other factors like a potential exit of Greece out of the eurozone. These concerns have remained in place over the last six years and the stock market has about tripled. The fact remains that interest rates are at a generational low (see also Stretching the High Yield Rubber Band), thereby supplying a scarcity of opportunities in the fixed income space. Diversification remains important, but regardless of your time horizon and risk tolerance, attractively valued equities, including high-quality, dividend-paying stocks should account for a certain portion of your portfolio. Any winning retirement playbook understands a low-cost, globally diversified portfolio, integrating a broad set of asset classes is the best way of preventing a “deflating” outcome in your long-term finances.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

At the pace of all this head-scratching going on, our population is likely to turn completely bald. One thing is for certain, nothing has scratched this Teflon stock market. If you want to have fun with a friend, family member or co-worker, just ask them how they feel about politics and then ask them how stocks have done this year? You’re bound to get some entertaining responses. Despite a Congress that has a lower favorability rating than cockroaches, lice, root canals, and colonoscopies , the S&P 500 index is up a whopping +22% and the NASDAQ index + 30% this year, both records. The USA Today ran with the Teflon theme and had this to say:

“This year alone the stock market has survived the recent brush with a U.S. debt default. It has also survived a government shutdown. Tax hikes. Government spending cuts. The threat of war. Terror at the Boston Marathon. A spike in interest rates. Plunging Apple shares. Stock exchange glitches. Fears of a less-friendly Federal Reserve. And a narrow escape from going over the “fiscal cliff.” Nothing bad seems to stick.”

The reason nothing is sticking to this Teflon market is because the market is more sensitive to reality rather than perception. Here are some come current discrepancies between these two states:

Perception: The economy is on the verge of a recession. Reality: The economy has grown GDP for 15 of the last 16 quarters. The private sector has added about 7.5 million jobs and the unemployment rate has been cut by about three percentage points.

These types of mental mistakes occur outside the realm of financial markets as well. For example, most people fail to correctly answer the question, “Which animal is responsible for the greatest number of human deaths in the U.S.?”

A.) Alligator; B.) Bear; C.) Deer; D.) Shark; and E.) Snake

The ANSWER: C) Deer.

Deer colliding into cars trigger seven times more deaths than alligators, bears, sharks, and snakes combined, according to Jason Zweig at the Wall Street Journal (see also Alligators & Airplane Crashes). Other mental disconnects include the belief that planes are more dangerous than cars. In fact, people are 65 times more likely to get killed in your own car versus a plane. Also, misconceptions exist that guns are more dangerous than smoking, or that tornadoes are more dangerous than asthma – both beliefs wrong.

I fully recognize there’s no honor in being Pollyannaish or a perma-bull just for the sake of it. However, it’s also very clear that excessive fear exercised by many investors proved very painful as S&P 500 level 666 has exploded to 1,744. The extreme panic that reached a pinnacle in 2009 has now morphed into an insidious skepticism (see Sentiment Pendulum ). Investor emotions continually swing from fear to greed, and with the political shenanigans going on in Washington DC, the skeptical pendulum has a long way before reaching euphoric levels. Or stated differently, the pre-party is over (see my article from earlier this year, Those Who Missed the Pre-Party), but the DJ is still playing and the cops aren’t here to break up the party yet.

I agree that we’ve had a Teflon market for a handful of years. There have been a few minimal scratches and a few hand burns along the way, but for the most part, those investors who have stayed invested and ignored the endless manufactured crisis headlines have been rewarded handsomely. Investing in stocks will always cause some heartburn, but if you don’t want your long-term retirement to get grilled, seared, pan-fried, or flambéed, then you want to make sure you still have some stocks in your Teflon pan.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), AAPL and GOOG, but at the time of publishing, SCM had no direct position in FB, TGT, TSLA, MCD, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Living in Southern California is extraordinary, but just like anything else, there are always tradeoffs, including traffic. Living in the United States is extraordinary too, but one of the detrimental tradeoffs is political gridlock…or is it? I am just as frustrated as anybody else that the knucklehead politicians in Washington can’t get their act together (especially on bipartisan issues such as taxes/immigration/deficits, etc.), but as it turns out, gridlock has created a significant financial silver lining.

Let’s take a look at some of the positive impacts of gridlock:

1) Federal Spending as % of GDP Declines

Source: Calafia Beach Pundit

The demands of both Tax-and-Spend Democrats and Tea-Partier Republicans fell on deaf ears thanks to gridlock. The U.S. didn’t institute the depth of austerity that the far-right wanted, and Congress didn’t implement the additional fiscal stimulus the far-left desired. The result has been a slow but steady recovery, which has brought spending closer to historical averages.

2) Private vs. Public Sector

Source: Calafia Beach Pundit

The implementation of more responsible (or less irresponsible) government spending has freed up resources and allowed the private sector to slowly add jobs. The next wave of sequestration spending cuts may unleash some more pain on the public sector and delay overall economic recovery further, but just like dieting, we will feel much better once we have shed more debt and spending – at least as a percentage of GDP.

3) Deficit Reduced Significantly

Source: Calafia Beach Pundit

The chart above is closely tied to point #1 (government spending), but as you can see, revenues have climbed significantly since 2010. I would argue plain economic cyclicality has more impact on the volatility of revenues. Blaming the current administration on the collapse or crediting them for the rebound is probably overstated. Comprehensive tax reform would likely have a lot more impact on the slope of revenues relative to the recent tax policy changes.

Source: Calafia Beach Pundit

The same picture can be seen from a different angle, as shown above (Deficit as % of GDP). While the absolute dollar amounts are staggeringly high, as a percentage of GDP, the percentage has been chopped by more than half since the peak of the crisis.

Everyone would like to see politicians solve all of our problems, but as we have experienced, deep philosophical differences can lead to political gridlock. When it comes to our nation’s finances, gridlock may not be optimal, but you can also see that a stalemate is not always the worst outcome either. As politicians continue to scream at each other with purple faces, I will monitor the developments from my car radio while in California gridlocked traffic…sunroof open of course.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Article is an excerpt from previously released Sidoxia Capital Management’s complementary February 1, 2013 newsletter. Subscribe on right side of page.

The red carpet was rolled out for the stock market in January with the Dow Jones Industrial Average rising +5.8% and the S&P 500 index up an equally impressive +5.0% (a little higher rate than the 0.0001% being earned in bank accounts). Movie stars are also strutting their stuff down the red carpet this time of the year as they collect shiny statues at ritzy award shows like the Golden Globes and Oscars. Given the vast volumes of honors bestowed, we thought what better time to put on our tuxes and create our own 2013 nominations for the economy and financial markets. If you are unhappy with our selections, you are welcome to cast your own votes in the comments section below.

By award category, here are Sidoxia’s 2013 selections:

Best Drama (Government Shutdown & Debt Ceiling): Washington D.C. has provided no shortage of drama, and the upcoming blockbusters of Shutdown & Debt Ceiling are worthy of its Best Drama nomination. If Congressional Democrats and Republicans don’t vote in favor of a new “Continuing Resolution” by March 27th, then our United States government will come to a grinding halt. At issue is Republican’s desire for additional government spending cuts to lower our deficit, which is likely to exceed $1 trillion for the fifth consecutive year. If you like more heart pumping drama, the Senate has just passed a Debt Ceiling extension through May 18th…mark those calendars!

Best Horror Film (Sequestration): Most people have already seen the scary prequel, The Fiscal Cliff, but the sequel Sequestration deserves the horror film honors of 2013. This upcoming blood-filled movie about broad, automatic, across-the-board government cost cuts will make any casual movie-watcher scream in terror. The $1.2 trillion in spending cuts (over 10 years) are so gory, many viewers may voluntarily leave the theater early. If you are waiting for the release, Sequestration is coming to a theater near you on March 1st, unless Congress, in an unlikely scenario, cancels the launch.

Best Director (Ben Bernanke): Federal Reserve Chairman Ben Bernanke’s film, entitled, The U.S. Economy, had a massive budget of about $16 trillion dollars, based on estimates of last year’s GDP (Gross Domestic Product). Nevertheless, Bernanke managed to do whatever it took (including trillions of dollars in bond buying) to prevent the economic movie studio from collapsing into bankruptcy. While many movie-goers were critical of his directorial debut, inflation has remained subdued thus far, and he has promised to continue his stimulative monetary policies (i.e., keep interest rates low) until the national unemployment rate falls below 6.5% or inflation rises above 2.5%.

Best Foreign Film (China): Americans are not the only people who produce movies globally. A certain country with a population of nearly 1.4 billion people also makes movies too…China. In the most recently completed 4th quarter, China’s economy experienced blockbuster growth in the form of +7.9% GDP expansion. This was the fastest pace achieved by China in two whole years. To put this metric into perspective, compare China’s heroic growth to the bomb created by the U.S. economy, which registered a disappointing -0.1% contraction at the economic box office. China’s popularity should bring in business all around the globe.

Best Special Effects (Japan): After coming out with a series of continuous flops, Japan recently launched some fresh new special effects in the form of a $116 billion emergency stimulus package. The country also has plans to superficially enhance the visual portrayal of its economy by implementing its own faux money-printing program modeled after our country’s quantitative easing actions (i.e., the Federal Reserve stimulus). As a result of these initiatives, the Japanese Nikkei index – their equivalent of our Dow Jones Industrial index – has risen by +29% in less than 3 months to a level of 11,138.66 (click here for chart). But don’t get too excited. This same Nikkei index peaked at 38,957 in 1989, a far cry from its current level.

Best Action Film (Icahn vs. Ackman): This surprisingly entertaining action film features a senile 76-year-old corporate raider and a white-haired, 46-year-old Harvard grad. The investment foes I am referring to are the elder Carl Icahn, Chairman of Icahn Enterprises, and junior Bill Ackman, CEO of Pershing Square Capital Management. In addition to terms such as crybaby, loser, and liar, the 27-minute verbal spat (view more here) between Icahn (his net worth equal to about $15 billion) and Ackman (net worth approaching $1 billion) includes some NC-17 profanity. The clash of these investment titans stems from a decade-old lawsuit, in addition to a recent disagreement over a controversial short position in Herbalife Ltd. (HLF), a nutritional multi-level marketing firm.

Best Documentary (Europe): As with a lot of reality-based films, many don’t receive a lot of attention. So too has been the commentary regarding the eurozone, which has been relatively peaceful compared to last spring. Despite the comparative media silence, European unemployment reached a new high of 11.8% late last year. This European documentary is not one you should ignore. European Central Bank (ECB) President Mario Draghi just stated, “The risks surrounding the outlook for the euro area remain on the downside.”

Best Original Song (National Anthem): We won’t read anything politically intoBeyonce’s lip-synced rendition of The Star-Spangled Bannerat the presidential inauguration, but she is still worthy of the Sidoxia nomination because music we hear in the movies is also recorded. I’m certain her rapping husband Jay-Z agrees whole-heartedly with this viewpoint.

Best Motion Picture (Sidoxia Video): It may only be three minutes long, but as my grandmother told me, “Great things come in small packages.” I may be a little biased, but judge for yourself by watching Sidoxia’s Oscar-worthy motion picture debut:

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in HLF, Japanese ETFs, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.

Article is an excerpt from previously released Sidoxia Capital Management’s complementary January 2, 2013 newsletter. Subscribe on right side of page.

There was plenty of fear, uncertainty, and doubt (F.U.D.) in 2012, and the gridlock in Washington has been a contributing factor to investors’ angst. As the saying goes, the stock market climbs a “wall of worry” and that was certainly the case this year with the S&P 500 index rising +13.4% (over +15% including dividends), and the Nasdaq index soaring +15.9% before dividends. Short-term investors had ample worries to fret about throughout the year, including a European financial collapse, the presidential elections, fiscal cliff negotiations, and a Mayan doomsday (see this hilarious clip). Despite these fears dominating the daily airwaves and newspaper headlines, long-term investors holding an adequate equity asset allocation jumped on the non-stop 2012 party train.

While Americans were served a full plate of concerns this year, global investors benefited from European Central Bank intervention by Mario Draghi who promised to do “whatever it takes” to save the euro currency (the European dominated EAFE index rose +13.6% in 2012). Growth here in the U.S. slowed as cautious consumers and businesses horded cash, but a rebound in the domestic housing market provided support to the sluggish economic expansion (3rd quarter GDP growth was revised higher to +3.1% vs. 2011).

Now that the presidential elections are over and we achieved a partial fiscal cliff deal, the amount of F.U.D. going into 2013 will diminish, which should provide a tailwind to economic growth and the financial markets. The impending debt ceiling and deficit reduction talks may slow the train down, but if a sufficient resolution can be accomplished, the economic party train can continue chugging along.

Attention: Grab Your Ear Muffs

Economists and strategists will continue to sound smart and be completely wrong about their 2013 predictions (seeStrategist Predictions & MacGyver), but that won’t stop average investors from neglecting their long-term investment plans. Investors have commonly overindulged in certain narrow asset classes like overpriced bonds and gold, which both underperformed equities in 2012. Diversification may sound like an overused finance cliché, but the principle is paramount if you are serious about reducing risk, beating inflation, and smoothing out incessant volatility.

2013 New Year’s Resolution: Avoid Personal Fiscal Cliff

With the New Year upon us, just because politicians have financial problems, it doesn’t mean you have to be fiscally irresponsible too. There is no better time than now to make a financial New Year’s resolution to avoid your own personal fiscal cliff. If you are too heavily parked in cash or over-exposed to low-yielding bonds subject to significant interest rate risk, then now is the time to re-evaluate your investment plan.

There is always something to worry about (see alsoUncertainty: Love It?), but in order to prevent working into your 80s, a long-term investment plan needs to be implemented, regardless of economic headlines or market volatility. In other words, investors need to replace their short-term microscope for their long-term telescope. By committing to a disciplined fiscal New Year’s resolution, you can earn a ticket on the 2013 party train!

Monthly News Tidbits

The presidential elections dominated the news cycle in November, but there were a whole host of other tidbits occurring over the last thirty-one days. Here are some of the main storylines:

Congress Approves Mini Fiscal Cliff Deal: After months of debate, Congress painfully and reluctantly agreed upon an estimated $600 billion mini fiscal cliff deal that represents the largest tax increase in two decades. Contrary to a $4 trillion “Grand Bargain” deal, this bill amounts to a more modest reduction in the deficit over 10 years. The Senate passed the bill by a margin of 89-8 and the House of Representatives by a spread of 257-167. The fact that any deal got done is somewhat surprising since the gridlock has been especially rampant in the House. As proof of this assertion, one need only point to the chamber’s meager voting activity record – the House has passed the fewest bills in 60 years during its recent term.

Fiscal Cliff Bill Details: Despite the Senate’s convincing voting margin, large numbers of Congressional Democrats and Republicans were unhappy with the bill’s details. The President made good on his campaign promises by securing revenue-raising taxes from wealthy Americans. More specifically, the law contains provisions including a 39.6% rate on earners above $400,000; a 20% capital gains rate increase from 15%; new exemption/deduction limits; an estate tax increase to 40% from 35%; and a measure to help prevent near-term milk price spikes. There are plenty more details, but I will spare your eyeballs and brain from the painful minutiae. If you haven’t had enough partisan politics, no need to worry, you have the debt ceiling debate to look forward to in a few months.

Same-Sex Marriage: The Supreme Court tackled a long-debated social issue and declared it would rule on the legality of a law denying benefits to same-sex couples in 2013.

New Female President: Additional hormones were added to the gender-skewed global pool of testosterone-filled leaders as South Korea elected its first female president, Park Geun-hye.

Global Bank Fined: Another greedy financial institution got caught with its hand in the cookie jar. UBS agreed to cough up a $1.5 billion penalty to the U.S., U.K., and Swiss authorities as part of an agreement to resolve its involvement in the manipulation of the London Interbank Offered Rate (LIBOR) – see alsoWall Street Meets Greed Street.

Sandy Hook Distressing Disaster: The gun control debate was reignited when 20-year-old Adam Lanza gunned down 20 children and 7 adults (including his mother) at a Connecticut elementary school – Sandy Hook Elementary. Besides the examination of an assault weapons ban, the government needs to revisit the inadequate awareness and resources devoted to the serious issue of mental illness.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including fixed income ETFs, but at the time of publishing SCM had no direct position in EFA, UBS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Article is an excerpt from previously released Sidoxia Capital Management’s complementary November 1, 2012 newsletter. Subscribe on right side of page.

Hurricane Sandy wreaked havoc across the East Coast, negatively impacting an estimated 60 million people and leaving more than 8 million people literally in the dark, without power. The hurricane may have been downgraded to a “superstorm” but the 90+ mile per hour winds and waves reaching up to 40 feet high created devastating economic impacts. How large were these impacts you may ask? This big swirly cloud that slammed into the Atlantic coastline shut down about ¼ of our economy; led to about 15,000 canceled flights; is expected to cut our nation’s Q4 output by up to -1.5% in GDP (Gross Domestic Product); and closed our financial markets for two days (the longest weather related closure of the New York Stock Exchange since 1888). Although the damage has been distressing for millions, about 5 million kids I think were okay with missing school on Monday (I’m going out on a limb with that guess).

Besides a superstorm-hurricane offered to us by Mother Nature, our country is about to undergo a new political hurricane next week with our nation’s presidential elections. Many polls show a statistical dead heat among the two candidates (Mitt Romney and Barack Obama), but political pundits point to the key battleground state of Ohio as the key determinant of the overall election results (Obama currently appears to have a slight lead in several polls). Some wildcard issues that could throw a wrench in an incumbent victory include a potential apathetic turnout by the Democratic voter base (hurt worse by “Superstorm Sandy”); worsening employment figures reported four days before the election; or perhaps a political gaffe. None of these polls are set in stone, and the situation remains rather fluid (no Sandy pun intended).

Regardless, whatever the political outcome, history shows us that the victor’s political affiliation has little correlation with the results in the financial markets. Ed Yardeni illustrated this point recently with the following chart:

Source: Yardeni.com

What many people seem to overlook is that there are many other variables besides political affiliation that can and will impact future financial market performance including, Congressional control that may be dominated or split by the opposing political party; monetary policy set by the Federal Reserve Bank; or uncontrollable globalization influences. As emerging market countries continue to outpace our economic growth, our country’s power and persuasion will naturally diminish due to the “law of large numbers”. In other words, as the largest, most powerful economic country in the world, the mathematical gravity hinders our country’s ability to grow rapidly.

Despite the economic and political challenges our country faces, we continue to move in the right direction, albeit at a very slow historical pace. As you can see from Ed Yardeni’s chart below, our recovery from the recent recession (bottom red line) is the worst recovery in more than 50 years. On the bright side, the freshly reported Q3 GDP figures came in at a +2.0% GDP rate – uninspiring, but an improvement from Q2, and better than Wall Street consensus forecasts.

Source: Yardeni.com

The growth has been considerably weak, yet the U.S. has still recorded 13 consecutive quarters of positive growth. Not bad considering Europe is in recession and countries like Spain are Greece are suffering unemployment rates of about 25%.

In order to maintain or accelerate economic growth, most Americans understand the Fiscal Cliff (~$700 billion in automatic spending cuts and tax hikes) needs to get resolved immediately. Failure to face this urgent challenge could have dire consequences, so voting for politicians who understand the immediacy of this problem is important.

Moving into Seasonally Strong Period

Selling in May, and going away for six months has not been a profitable strategy this year, as measured by the S&P 500 index. Furthermore, investors have also survived the historically scary performance months of September and October. Nothing is ever guaranteed, but historically the months of November through April tend to be rewarding periods.

Blowing against this positive seasonal trend have been lifeless earnings. In fact, corporate profits and revenue growth have slowed to a trickle in Q3, thanks to lackluster results from companies like Caterpillar (CAT); General Electric (GE); 3M Company (MMM); United Technologies (UTX); McDonalds (MCD); and others. Denying the global slowdown is difficult, but there are signs of stabilization and fortunately financial markets look forward and not backward.

Overshadowing some of that recent slowing growth has been the positive development in the housing market. As one can see in the chart below, housing starts are up significantly at +60% from early last year, but history tells us there is still plenty of room to move higher.

Source: Calafia Beach Report

Year-to-date stock performance has been nothing short of spectacular either. Although stocks were down about -2% in October, the S&P 500 index remains up +12% through October, and that excludes about +2% in dividends. If you look at the overall asset classes in the chart below, real estate is the winning segment this year with U.S. stocks not far behind. Commodities have fared the worst and the fixed income asset class showed modest gains relative to global equities.

Source: Hays Advisory Blog

Within U.S. stocks, the largest of large stocks (“Megacaps”) have enjoyed the best results. This trend is not surprising given the significant uncertainties investors are reviewing (e.g., elections, Fiscal Cliff, Europe, etc.).

Source: Calafia Beach Report

The recent Hurricane Sandy turned superstorm caused enormous damage to our country, and the political and economic hurricanes we have experienced over the last few years have yet to be conquered. The good news, in all these cases (physical and financial), is that the clouds are in the process of lifting; the worst damage should be behind us; our outlook will be more certain; and we can now begin focusing on the rebuilding process.

Like Washington, individual investors cannot afford to ignore their own personal Fiscal Cliffs. In a future entitlement-pressured world, investors need to proactively develop an investment plan, because ignoring your investments by kicking the can down the road only does more harm than good. I’m confident that, regardless of the election results next week, cooler heads will eventually prevail, and Democrats and Republicans can work together to solve our country’s Fiscal Cliff problems. Superstorm Sandy will not be the last natural disaster our country faces, but like investing, the more prepared one is for these unforeseen events, the better you will be equipped to conquer your financial future.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct positions in CAT, MMM, GE, UTX, MCD, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Article is an excerpt from previously released Sidoxia Capital Management’s complementary October 1, 2012 newsletter. Subscribe on right side of page.

As September has come to a close, the grand finale of our annual seasons has commenced… autumn. How do we know autumn is here? Well, for starters, the leaves are changing colors; the weather is about to cool; and the NFL replacement referees are watching Sunday football games from their couches.

While 2012 is split into quarters, football games and investment seasons are also divided into four quarters. Right now, the economic fourth quarter has just started and the home team is winning. As we can see from the stock market scoreboard, the S&P 500 index is up +15% this year (+6% in Q3) and the NASDAQ index has catapulted +20% through September (+6% also in Q3). The U.S. home team is winning, but a fumble, blocked kick, or interception could mean the difference between an exciting win and a devastating loss.

Another game divided into four parts is the game of presidential politics. However, presidential elections are divided into four years – not four quarters. Five weeks from now, we’ll find out if our Commander in Chief Obama will get to lead our team for another game lasting four years, or whether backup quarterback Mit Romney will be called into the game. The fans are getting restless due to anemic growth and lingering joblessness, but for now, the coach is keeping the president in the starting lineup. Both President Obama and Governor Romney will take some head-to-head practice snaps against each other in the first of three scheduled presidential debates beginning this week.

Bernanke Changes Rules

The New York Jets have Tim Tebow for their secret weapon (1 for 1 yesterday!), and the United States economy has Ben Bernanke. Although our home team may be winning, it has required some monetary rule-changing policies to be instituted by Federal Reserve Chairman Ben Bernanke to keep our team in the lead. Just a few weeks ago, Mr. Bernake instituted QE3 (3rd round of quantitative easing), which is an open-ended mortgage buying program designed to lower home buying interest rates and stimulate the economy (see Helicopter Ben to QE3 Rescue). The short-term benefits of the $40 billion monthly bond buying binge are relatively clear (lower borrowing costs for homebuyers), but the longer-term costs of inflation are stewing patiently on the backburner.

Source: Calafia Beach Pundit (Scott Grannis)

As you can see from the chart above, August median home prices are up +10% for existing single-family homes over the last year. Housing affordability is at extremely attractive levels, and although the bank loan purse strings are tight, a modest loosening is beginning to unfold.

Economy Playing Injured

Our starters may still be playing, but many are injured, just like the jobless are limping through the employment market. Encouragingly, although unemployment remains stubbornly high, the number of people collecting unemployment checks is a lot lower (-1.25 million fewer than a year ago). Not great news, but at least we are hobbling in the right direction (see chart below).

Source: Calafia Beach Pundit (Scott Grannis)

Time for Fiscal Cliff Hail Mary?

If a team is losing at the end of a game, a “Hail Mary” pass might be necessary. We are quickly nearing this fiscal Armageddon situation as the approximately $700 billion “fiscal cliff” (a painful combo of spending cuts and tax hikes) kicks in at the end of the year (see PIMCO chart below via The Reformed Broker).

Running trillion dollar deficits in perpetuity is not a sustainable strategy, so for most people, a combination of spending cuts and/or tax hikes makes sense to narrow the gap (see chart below). Last year’s recommendations from the bipartisan Simpson-Bowles commission, which were ignored, are not a bad place to start. What happens in the lame-duck session of Congress (after the elections) will dramatically impact the score of the current economic game, and decide who wins and who loses.

Source: Calafia Beach Pundit (Scott Grannis)

Heated debates continue on how the gap between expenses and revenues will be narrowed, but regardless, Democrats will continue to push for capital gains tax hikes on the rich (see tax chart below); and the Republicans will push to cut spending on entitlements, including untenable programs like Medicare and Social Security.

Source: The Wall Street Journal

The game is not quite over, but the fourth quarter promises to be a bloody battle. So while the replacement refs may be back at home, the experienced returning refs have been known to blow calls too. Let’s just hope that autumn, the season of bounteous fecundity, ends up being a continued trend of sweet market success, rather than a political period of botched opportunities.

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